Edgar Filing: GWG Holdings, Inc.

f10q0612_gwgholdings.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

__________________________

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2012

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from _________ to ________

Commission File Number: None

GWG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		26-2222607
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

220 South Sixth Street, Suite 1200

Minneapolis, MN 55402

(Address of principal executive offices, including zip code)

(612) 746-1944

(Registrant’s telephone number, including area code)

________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. T Yes £ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes £ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

	Large accelerated filer	£	Accelerated filer	£
	Non-accelerated filer	£	Smaller reporting company	T

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). £ Yes T No

As of August 14, 2012, GWG Holdings, Inc. had 9,989,000 shares of common stock outstanding.

GWG HOLDINGS, INC.

Index to Form 10-Q

for the Quarter Ended June 30, 2012

		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited), and December 31, 2011	2

	Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2012 and 2011(unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the three months and six months ended June 30, 2012 and 2011(unaudited)	5

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 6.	Exhibits	36

SIGNATURES		37

-1-

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2012			December 31, 2011
	(unaudited)
A S S E T S
Cash and cash equivalents	$	11,094,825		$	1,878,349
Restricted cash		4,851,664			4,794,302
Investment in life settlements, at fair value		133,848,138			122,168,524
Other assets		487,963			548,100
TOTAL ASSETS	$	150,282,590		$	129,389,275

L I A B I L I T I E S & E Q U I T Y
LIABILITIES
Revolving credit facility	$	66,000,000		$	60,000,000
Series I Secured notes payable		40,821,635			48,179,271
Secured renewable debentures		15,091,121			-
Interest payable		2,315,975			1,887,835
Accounts payable and accrued expenses		1,229,037			1,404,107
Deferred taxes, net		3,778,357			4,308,217
TOTAL LIABILITIES		129,236,125			115,779,430

CONVERTIBLE, REDEEMABLE PREFERRED STOCK
(par value $0.001; shares authorized 40,000,000; shares issued and outstanding 3,249,992 and 1,881,329; liquidation preference of $24,375,000 (unaudited) and $14,110,000, respectively)		22,512,581			12,661,276

(DEFICIT) EQUITY
Common stock (par value $0.001: shares authorized 210,000,000; shares issued and outstanding is 9,989,000 on both June 30, 2012 (unaudited) and December 31, 2011)		9,989			9,989
Additional paid-in capital		7,605,748			8,169,303
Accumulated deficit		(9,081,853	)		(7,230,723	)
TOTAL (DEFICIT) EQUITY		(1,466,116	)		948,569

TOTAL LIABILITIES & (DEFICIT) EQUITY	$	150,282,590		$	129,389,275

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

-2-

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended					Six Months Ended
	June 30, 2012		June 30, 2011			June 30, 2012			June 30, 2011
REVENUE
Gain on life settlements, net	$	4,867,478	$	4,936,468		$	5,469,246		$	10,294,109
Interest and other income		47,563		1,814			48,894			31,970
TOTAL REVENUE		4,915,041		4,938,282			5,518,140			10,326,079

EXPENSES
Employee compensation and benefits		583,338		458,750			1,117,084			942,020
Legal and professional fees		337,179		150,249			701,403			310,549
Interest expense		2,379,578		1,968,799			4,817,991			3,311,212
Other expenses		703,659		399,403			1,262,652			568,517
TOTAL EXPENSES		4,003,754		2,977,201			7,899,130			5,132,298

INCOME (LOSS) BEFORE INCOME TAXES		911,287		1,961,081			(2,380,990	)		5,193,781
INCOME TAX EXPENSE (BENEFIT)		609,588		3,779,000			(529,860	)		3,781,500

NET INCOME (LOSS)	$	301,699	$	(1,817,919	)	$	(1,851,130	)	$	1,412,281

EARNINGS (LOSS) PER SHARE
Basic	$	0.03	$	(0.20	)	$	(0.19	)	$	0.16
Diluted	$	0.03	$	(0.20	)	$	(0.19	)	$	0.16

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		9,989,000		9,000,000			9,989,000			9,000,000
Diluted		9,989,000		9,000,000			9,989,000			9,000,000

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – CONTINUED

(unaudited)

PROFORMA INFORMATION AS IF THE COMPANY HAD BEEN A CORPORATION DURING THE:	Three Months Ended June 30, 2011		Six Months Ended June 30, 2011

INCOME BEFORE INCOME TAXES	$	1,961,081		5,193,781
INCOME TAX EXPENSE		770,705		2,041,156

NET INCOME	$	1,190,376	$	3,152,625

PROFORMA EARNINGS PER SHARE ATTRIBUTABLE TO
CONTROLLING INTERESTS
BASIC	$	0.13	$	0.35
FULLY DILUTED	$	0.13	$	0.35

PROFORMA WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC		9,000,000		9,000,000
FULLY DILUTED		9,000,000		9,000,000

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

-4-

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	301,699		$	(1,817,919	)	$	(1,851,130	)	$	1,412,281
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Gain on life settlements		(4,575,941	)		(7,196,313	)		(10,990,249	)		(16,638,593	)
Amortization of deferred financing and issuance costs		342,297			58,224			909,457			116,448
Deferred income taxes		609,588			3,779,000			(529,860	)		3,779,000
Convertible, redeemable preferred stock dividends payable		294,935			-			421,010			-
(Increase) decrease in operating assets:
Other assets		(298,060	)		(785,402	)		1,057,285			(552,005	)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses		101,452			(591,231	)		659,134			(194,843	)

NET CASH FLOWS USED IN OPERATING ACTIVITIES		(3,224,030	)		(6,553,641	)		(10,324,353	)		(12,077,712	)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in life settlements		(1,468,770	)		(5,552,360	)		(2,622,030	)		(9,123,730	)
Reduction from maturity of life settlements		416,665			-			416,665			-
NET CASH FLOWS USED IN INVESTING ACTIVITIES		(1,052,105	)		(5,552,360	)		(2,205,365	)		(9,123,730	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from revolving credit facility		3,500,000			6,627,049			6,000,000			11,089,548
Proceeds from issuance of Series I Secured notes payable		-			6,436,922			50,000			11,342,855
Payments for redemption of Series I Secured notes payable		(1,918,420	)		(2,272,658	)		(3,468,957	)		(4,287,579	)
Proceeds from issuance of renewable secured debentures		12,695,213			-			15,757,086			-
Payments for redemption of renewable secured debentures		(712,587	)		-			(712,587	)		-
Proceeds from (transfers to) restricted cash		(3,282,199	)		1,389,886			(57,361	)		1,647,558
Issuance of preferred stock		1,350,910			-			5,787,375			-
Payment of issuance cost		(810,722	)		-			(1,609,362	)		-
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES		10,822,195			12,181,199			21,746,194			19,792,382

NET INCREASE IN CASH AND CASH EQUIVALENTS		6,546,060			75,198			9,216,476			(1,409,060	)

CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD		4,548,765			273,972			1,878,349			1,758,230
END OF PERIOD	$	11,094,825		$	349,170		$	11,094,825		$	349,170

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

-5-

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED

(unaudited)

	Three Months Ended				Six Months Ended
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid	$	1,313,000	$	1,054,000	$	2,462,000	$	2,415,000
NON-CASH INVESTING AND FINANCING ACTIVITIES
Convertible, redeemable preferred stock:
Non-cash conversion of Series I secured notes	$	1,130,000	$	-	$	4,220,000	$	-
Non-cash conversion of accrued interest payable on Series I secured notes to preferred stock	$	4,000	$	-	$	8,000	$	-
Non-cash accretion of convertible, redeemable preferred stock to redemption value	$	340,000	$	-	$	729,000	$	-
Non-cash conversion of dividends payable to convertible, redeemable preferred stock	$	138,000	$	-	$	250,000	$	-
Warrants issued to purchase common stock	$	183,000	$	-	$	203,000	$	-
Non-cash conversion of accrued interest payable on Series I secured notes to Series I secured note principal	$	37,000	$	-	$	70,000	$	-
Conversion from LLC to corporation	$	-	$	6,871,000	$	-	$	6,871,000
Investment in life settlements included in accounts payable	$	108,000	$	-	$	108,000	$	-

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

-6-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

( 1 ) Nature of business and summary of significant accounting policies

Nature of business - GWG Holdings, Inc. (Holdings) (previously GWG Holdings, LLC) and Subsidiaries, located in Minneapolis, Minnesota, facilitates the purchase of life insurance policies for its own investment portfolio through its wholly owned subsidiary, GWG Life Settlements, LLC (GWG Life), and its subsidiaries, GWG Trust (Trust), GWG DLP Funding II, LLC (DLP II) and its wholly owned subsidiary, GWG DLP Master Trust II (the Trust II). Holdings converted from a limited liability company into a corporation effective June 10, 2011 and as a result of this change all member units were converted into common stock. Holdings and its subsidiaries finance the acquisition of life insurance policies and pays policy premiums through amounts available on its line of credit and other debt and equity securities as well as from revenues from maturities of life insurance policies. Holdings earns fees for brokering policy transactions between market participants through its wholly owned subsidiary, GWG Broker Services, LLC (Broker Services). GWG Member, LLC a wholly owned subsidiary formed November 2010 to facilitate the acquisition of policies, has not commenced operations as of June 30, 2012. The entities were legally organized in Delaware and are collectively referred herein to as GWG, or the Company.

Basis of presentation - The condensed consolidated balance sheet as of June 30, 2012, the condensed consolidated statements of operations for the three months and six months ended June 30, 2012 and 2011, and the condensed consolidated statements of cash flows for the three months and six months ended June 30, 2012 and 2011, and the related information presented in these notes, have been prepared by management in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, without audit. To the extent that information and notes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements are contained in or are consistent with the consolidated audited financial statements in the Company’s Form 10-K for the year ended December 31, 2011, such information and notes have not been duplicated herein. In the opinion of management, all adjustments considered necessary for a fair presentation of results have been included. The condensed consolidated balance sheet at December 31, 2011 was derived from the audited consolidated financial statements as of that date. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Special Financial Report on Form 10-K for the year ended December 31, 2011.

Use of estimates - The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these consolidated financial statements relates to (1) the determination of the assumptions used in estimating the fair value of the investment in life insurance policies, and (2) the value of deferred tax assets.

Operating agreement – Effective June 10, 2011, the Company filed a certificate of conversion from a limited liability company into a corporation, registered in the state of Delaware. With this conversion, the Company is authorized to issue 210,000,000 shares of common stock, par value $.001, and 40,000,000 shares of preferred stock, par value $.001. In connection with the conversion, the outstanding member units were converted to 4,500,000 shares of common stock (prior to giving effect to the August 9, 2011 two-for-one forward stock split discussed below). Common stock dividends distributed subsequent to the conversion will be recorded as a reduction of paid in capital until the Company reflects accumulated positive earnings.

-7-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

On July 31, 2011, the Company began a private placement offering for the sale of up to 3,333,333 shares of Series A 10% convertible, redeemable preferred stock at an offering price of $7.50 per share (see note 10).

On August 9, 2011 the Company filed an amendment to its certificate of incorporation to effect a two-for-one forward stock split of its common stock. Unless otherwise noted, all share amounts contained in these consolidated financial statements are post-split share amounts determined after giving effect to the forward stock split.

Life settlements - ASC 325-30, Investments in Insurance Contracts, allows an investor the election to account for its investments in life settlements using either the investment method or the fair value method. The election shall be made on an instrument-by-instrument basis and is irrevocable. Under the investment method, an investor shall recognize the initial investment at the purchase price plus all initial direct costs. Continuing costs (policy premiums and direct external costs, if any) to keep the policy in force shall be capitalized. Under the fair value method, an investor shall recognize the initial investment at the purchase price. In subsequent periods, the investor shall re-measure the investment at fair value in its entirety at each reporting period and shall recognize the change in fair value in current period income net of premiums paid. The Company uses the fair value method to account for all investments in life settlements.

The Company recognizes the difference between the death benefits received and carrying values of the life insurance policy when an insured event has occurred and the Company determines that settlement and ultimate collection of the death benefits is realizable and reasonably assured. Revenue from a transaction must meet both criteria in order to be recognized. The Company recognizes realized gains (revenue) from life settlement contracts upon one of the two following events:

1) Receipt of death notice or verified obituary of insured

2) Sale of policy and filing of change of ownership forms and receipt of payment

Deposits and initial direct costs advanced on policies to be purchased, but not yet settled, are recorded as other assets until policy ownership has been transferred to the Company.

Deferred financing and issuance costs – Financing costs incurred to obtain financing under the revolving credit facility have been capitalized and are amortized using the straight-line method over the term of the revolving credit facility. Amortization of deferred financing costs related to the revolving credit was $58,000 for each of the three months ended June 30, 2012 and 2011. Amortization of deferred financing costs related to the revolving credit facility was $116,000 for each of the six months ended June 30, 2012 and 2011 and is included in interest expense in the statement of operations. The expected amortization expense is $116,000 and $97,000 for the six months ending December 31, 2012 and the year ending December 31, 2013, respectively. The Series I Secured note obligations, as described in note 7, are reported net of issuance costs, sales commissions and other direct expenses, which are amortized using the interest method over the term of the borrowings. The renewable secured debentures, as described in note 8, are reported net of issuance costs, sales commissions, and other direct expenses, which are amortized using the interest method over the term of the borrowings. The Series A convertible, redeemable preferred stock, as described in note 10, is reported net of issuance costs, sales commissions, and other direct expenses. The discount is amortized directly to equity using the interest method over the three year redemption period to the redemption amount.

Earnings (loss) per share – The Company converted from a limited liability company into a corporation effective June 10, 2011, and as a result of this change all member units were converted into common stock. The earnings (loss) per share has been restated to reflect the equivalent common stock per share amounts as of the earliest period reported. Basic per share earnings (loss) is calculated using the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated based on the potential dilutive impact, if any, of the Company’s preferred stock and outstanding warrants. The Company has 538,234 warrants and 4,874,988 shares of Convertible Redeemable Preferred Stock (equivalent common shares if Convertible Redeemable Preferred Stock were converted into common stock) outstanding as of June 30, 2012. The Convertible Redeemable Preferred Stock and warrants are anti-dilutive for the three and six months ended June 30, 2012.

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GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Recently adopted pronouncements – In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which amends disclosure requirements related to categorization within the fair value hierarchy. This update results in common principles and requirements for measuring fair value and disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards. The guidance became effective January 1, 2012. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Other pronouncements issued by the FASB with future effective dates are either not applicable or are not expected to be significant to the Company.

( 2 ) Restrictions on cash

The Company is required by its lenders to maintain collection and escrow accounts. These accounts are used to fund the acquisition and pay annual premiums of insurance policies and to pay interest and other charges under its revolving credit facility. DZ Bank AG, as agent for Autobahn Funding Company, LLC, the lender for the revolving credit facility as described in note 6, authorizes the disbursements from these accounts. At June 30, 2012 and December 31, 2011 there was a balance of $4,852,000, and $4,794,000, respectively, maintained in these restricted cash accounts.

( 3 ) Investment in life insurance policies

The life insurance policies (Level 3 financial instruments) are valued based on unobservable inputs that are significant to the overall fair value measurement. Changes in the fair value of these instruments are recorded in gain or loss on life insurance policies in the consolidated statements of operations (net of the cash premiums paid on the policies). The fair value is determined on a discounted cash flow basis that incorporates current life expectancy assumptions. Life expectancy reports have been obtained from widely accepted life expectancy providers. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require. As a result of management’s analysis, discount rates of 13.39% and 13.41% were applied to the portfolio as of June 30, 2012 and December 31, 2011, respectively.

A summary of the Company’s life insurance policies accounted for under the fair value method, based on remaining life expectancy is as follows:

	As of June 30, 2012						As of December 31, 2011
Years Ending December 31,	Number of Contracts		Estimated Fair Value		Face Value		Number of Contracts		Estimated Fair Value		Face Value
2012		-	$	-	$	-		-	$	-	$	-
2013		-		-		-		-		-		-
2014		-		-		-		1		535,000		1,000,000
2015		5		2,826,000		5,329,000		5		4,636,000		9,329,000
2016		11		11,064,000		26,135,000		10		12,930,000		34,835,000
2017		26		24,966,000		65,998,000		29		24,144,000		71,998,000
2018		35		25,500,000		80,008,000		34		23,500,000		81,858,000
Thereafter		108		69,492,000		311,785,000		96		56,424,000		277,385,000
Totals		185	$	133,848,000	$	489,255,000		175	$	122,169,000	$	476,405,000

There were no death benefits recognized by the Company during the six months period ended June 30, 2011. The Company received cash from death benefits of $4,500,000 in April 2012.

-9-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Reconciliation of gain on life settlements:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Change in fair value	$	4,576,000		$	8,293,000		$	9,367,000		$	16,704,000
Premiums and other annual fees		(3,792,000	)		(3,357,000	)		(7,981,000	)		(6,410,000	)
Policy maturities		4,083,000			-			4,083,000			-
Gain on life settlements, net	$	4,867,000		$	4,936,000		$	5,469,000		$	10,294,000

The estimated expected premium payments to maintain the above life insurance policies in force for the next five years, assuming no mortalities, are as follows:

Years Ending December 31,
Six months ending December 31, 2012	$	7,976,000
2013		16,149,000
2014		17,301,000
2015		18,603,000
2016		20,062,000
	$	80,091,000

Management anticipates funding the estimated premium payments as noted above with proceeds from the DZ Bank revolving credit facility and through additional debt and equity financing as well as cash proceeds from maturities of life insurance policies. The proceeds of these capital sources are also intended to be used for the purchase, financing, and maintenance of additional life insurance policies.

( 4 ) Fair value definition and hierarchy

ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace including the existence and transparency of transactions between market participants. Assets and liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices in an orderly market generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. ASC 820 establishes a three-level valuation hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

The hierarchy is broken down into three levels based on the observability of inputs as follows:

●

Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

●	Level 2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

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GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

●	Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The availability of observable inputs can vary by types of assets and liabilities and is affected by a wide variety of factors, including, for example, whether the investment is established in the marketplace, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for assets and liabilities categorized in Level 3.

Life insurance policies represent financial instruments recorded at fair value on a recurring basis. The following table reconciles the beginning and ending fair value of the Company’s Level 3 investments in life insurance policies for the following periods:

	Three month ended June 30,					Six months ended June 30,
	2012			2011		2012			2011
Beginning balance	$	128,112,000		$	95,731,000	$	122,169,000		$	82,718,000
Purchases		1,576,000			4,490,000		2,728,000			9,124,000
Maturities (cash in excess of carrying value)		(416,000	)		-		(416,000	)		-
Net change in fair value		4,576,000			8,259,000		9,367,000			16,638,000
Ending balance (June 30)	$	133,848,000		$	108,480,000	$	133,848,000		$	108,480,000

The fair value of a portfolio of life insurance policies is based on information available to the Company at the reporting date. Fair value is based upon a discounted cash flow model that incorporates current life expectancy assumptions. Life expectancy reports are obtained from independent, third-party widely accepted life expectancy providers at policy acquisition. The life expectancy values of each policy holder, as determined at policy acquisition, are rolled down monthly by the MAPS actuarial software the Company uses for ongoing valuation of its portfolio of life insurance policies. The Company also orders new life expectancy reports from time to time on existing policies already in the portfolio. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and management’s estimate of the risk premium an investor in the portfolio of life insurance policies would require.

The fair value of life insurance policies is estimated using present value calculations of estimated cash flows based on the data specific to each individual life insurance policy. The following summarizes inputs utilized in estimating the fair value of the portfolio of life insurance policies:

	As of June 30,			As of December 31,
	2012			2011
Weighted average age of insured		81.2			80.9
Weighted average life expectancy, months*		90.1			93.6
Average face amount per policy	$	2,644,622		$	2,722,315
Discount rate		13.39	%		13.41	%

* Standard life expectancy as adjusted for insured’s specific circumstances.

-11-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

These assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may be significant. The techniques used in estimating the present value of estimated cash flows are derived from valuation techniques generally used in the industry that include inputs for the asset that are not based on observable market data. The extent to which the fair value could reasonable vary in the near term has been quantified by evaluating the effect of changes in significant underlying assumptions used to estimate the fair value. If the life expectancies were increased or decreased by 4 months on each outstanding policy and the discount factors were increased or decreased by 1% while all other variables are held constant, the fair value of the investment in life insurance policies would increase or (decrease) by the amounts summarized below:

	Change in life expectancy
	plus 4 months				minus 4 months
Investment in life policies
June 30, 2012		$	(10,167,000	)		$	10,460,000

December 31, 2011		$	(9,660,000	)		$	9,951,000

	Change in discount rate
	plus 1%				minus 1%
Investment in life policies
June 30, 2012		$	(6,881,000	)		$	7,472,000

December 31, 2011		$	(6,665,000	)		$	7,254,000

Carrying value of receivables, prepaid expenses, accounts payable and accrued expenses approximate fair value due to their short term maturities and low credit risk. The estimated fair value of the Company’s Series I Secured notes payable is approximately $42,246,000 based on a weighted average market interest rate of 7.25%. The Company began issuing Renewable Secured Debentures in the first quarter of 2012. The current interest rates on the Renewable Secured Debentures approximate market value. The carrying value of the revolving credit facility reflects interest charged at the commercial paper rate plus an applicable margin. The margin represents our credit risk, and the strength of the portfolio of life insurance policies collateralizing the debt. Management believes this margin has not changed over time. The overall rate reflects market, and the carrying value of the revolver approximates fair value.

The Company has issued warrants to purchase common stock in connection with the issuance of its preferred stock. These warrants are Level 3 instruments and are measured at fair value upon issuance. The Company issued 139,417 warrants through December 31, 2011. The estimated fair value per warrant as of the date of issuance was $0.11 as determined using the Black-Scholes model and included an assumed life of three years, a risk free interest rate of 0.42% and a volatility rate of 25.25%. The Company issued an additional 76,312 warrants during the three months ended March 31, 2012. The estimated fair value per warrant issued during the three months ended March 31, 2012 was $0.26 using the Black-Scholes model and included an assumed life of three years, a risk free interest rate of 0.38% and a volatility rate of 36.20%. The Company issued an additional 322,505 warrants during the three months ended June 30, 2012. The estimated fair value per warrant issued during the three months ended June 30, 2012 was $0.58 using the Black-Scholes model and included an assumed life of three years, a risk free interest rate of 0.41% and a volatility rate of 47.36%.

The Company has not changed its methodology in estimating fair value from prior periods.

-12-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

( 5 ) Notes receivable from related parties

Notes receivable from related parties consisted of various unsecured notes receivable. These notes were due from shareholders of the Company, with interest rates ranging from 4.2% to 5%, payable annually and were paid in full July 27, 2011. Interest income from related parties totaled $24,000 during the six months ended June 30, 2011. As a part of the Company’s compensation plan effective January 1, 2011, interest income earned on these notes were treated as guaranteed payments to the members and are included in employee compensation and benefits in the statement of operations for the six months ended June 30, 2011. On July 27, 2011, the Company paid dividends to the shareholders in the amount of their respective note receivable balances. They immediately repaid their balance due on each note and the related accrued interest in full.

As of June 30, 2012, and 2011, the Company had receivables totaling $5,000,000 due from an affiliate, Opportunity Finance, LLC, that were fully reserved. Opportunity Finance ceased operations in 2008.

( 6 ) Credit facilities

Revolving credit facility – Autobahn Funding Company LLC

On July 15, 2008, DLP II and United Lending entered into a revolving credit facility pursuant to a Credit and Security Agreement (Agreement) with Autobahn Funding Company LLC (Autobahn), providing the Company with a maximum borrowing amount of $100,000,000. Autobahn is a commercial paper conduit that issues commercial paper to investors in order to provide funding to DLP II and United Lending. DZ Bank AG acts as the agent for Autobahn. The Agreement expires on July 15, 2013. The amount outstanding under this facility as of June 30, 2012 and December 31, 2011, was $66,000,000 and $60,000,000, respectively.

The Agreement requires DLP II or United Lending to pay, on a monthly basis, interest at the commercial paper rate plus an applicable margin, as defined in the Agreement. The effective rate was 2.13% and 2.25% at June 30, 2012 and December 31, 2011, respectively. The weighted average effective interest rate (excluding the unused line fee) was 2.19% and 2.17% for the six months ended June 30, 2012 and 2011, respectively, and 2.12% and 2.11% for the three months ended June 30, 2012 and 2011, respectively. The Agreement also requires payment of an unused line fee on the unfunded amount under the revolving credit facility. The note is secured by substantially all of DLP II and United Lending assets which consist primarily of life settlement policies.

The Agreement has certain financial and nonfinancial covenants. The Company is in compliance with these covenants at June 30, 2012. The Agreement generally prohibits the Company from:

·	changing its corporate name, offices, and jurisdiction of incorporation

·	changing any deposit accounts or payment instructions to insurers;

·	changing any operating policies and practices such that it would be reasonably likely to adversely affect the collectability of any asset in any material respect;

·	merging or consolidating with, or selling all or substantially all of its assets to, any third party;

·	selling any collateral or creating or permitting to exist any adverse claim upon any collateral;

·	engaging in any other business or activity than that contemplated by the Agreement;

·	incurring or guaranteeing any debt for borrowed money;

·	amending the Company’s certificate of incorporation or bylaws;

·	making any loans or advances to, investments in, or paying any dividends to, any person unless both before and after any such loan, advance, investment or dividend there exists no actual event of default, potential event of default or termination event;

·	removing an independent director on the board of directors except for cause or with the consent of the lender; or

·	making payment on or issuing any subsidiary secured notes or debentures, or amending any agreements respecting such notes or debentures, if an event of default, potential event of default or termination event exists or would arise from any such action.

In addition, the Company has agreed to maintain (i) a positive consolidated net income (as defined and calculated under the Agreement) for each complete fiscal year and (ii) a tangible net worth (again, as defined and calculated under the Agreement) of not less than $5 million.

Advances under the Agreement are subject to a borrowing base formula, which limits the availability of advances on the borrowing base calculation based on attributes of policies pledged to the facility. Over-concentration of policies by insurance carrier, and over-concentration of policies by insurance carriers with ratings below a AA- rating are the two primary factors with the potential of limiting availability of funds on the facility. Total funds available for additional borrowings under the borrowing base formula criteria at June 30, 2012 and December 31, 2011, were $8,755,000 and $7,691,000 respectively.

Holdings is not obligated under this credit facility to guarantee loan or interest payments to Autobahn: however, Holdings is obligated under a performance guaranty to provide servicing for policies held by DLP II.

Lending agreement with affiliate

The Company entered into an Investment Agreement with an affiliate Insurance Strategies Fund, LLC (ISF) on September 3, 2009. Under the terms of this agreement, ISF will provide working capital loans to the Company for general working capital needs and expenses. The Company does not expect to take working capital loans under this agreement during the foreseeable future.

( 7 ) Series I Secured notes payable

Series I Secured notes payable have been issued in conjunction with the GWG Series I Secured notes private placement memorandum dated August 25, 2009 (last revised November 15, 2010). On June 14, 2011 the Company closed the offering to additional investors, however, existing investors may elect to continue advancing amounts outstanding upon maturity. Series I Secured notes have maturity dates ranging from six months to seven years with fixed interest rates varying from 7.0% to 9.55% depending on the term of the note. Interest is payable monthly, quarterly, annually or at maturity depending on the terms of the note. At June 30, 2012 and December 31, 2011 the weighted average interest rates of Series I Secured notes were 8.17%, and 8.04% respectively. The notes are secured by assets of GWG Life. The amount outstanding under these Series I Secured notes was $41,762,000 and $49,332,000 at June 30, 2012, and December 31, 2011, respectively. The difference between the amount outstanding on the Series I Secured notes and the carrying amount on the consolidated balance sheet is due to netting of unamortized deferred issuance costs. Overall, interest expense includes amortization of deferred financing and issuance costs of $746,000 and $780,000 for the six months ended June 30, 2012 and 2011, respectively, and $237,000 and $645,000 for the three months ended June 30, 2012 and 2011, respectively. Future expected amortization of deferred financing costs is $941,000.

-13-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

On November 15, 2010, the owners pledged their ownership interests in the Company to the Series I Trust as security for advances under the Series I Trust arrangement.

The use of proceeds from the issuances of Series I Secured notes was limited to the following: (1) payment of commissions of Series I Secured note sales, (2) purchase life insurance policies, (3) pay premiums of life insurance policies, (4) pay principal and interest to Senior Liquidity Provider (DZ Bank), (5) pay portfolio or note operating fees or costs, (6) pay trustee (Wells Fargo Bank, N.A.), (7) pay servicer and collateral fees, (8) pay principal and interest on Series I Secured notes, (9) make distributions to equity holders for tax liability related to portfolio, (10) purchase interest rate caps, swaps, or hedging instruments, (11) pay GWG Series I Trustee fees, and (12) Pay offering expenses.

On November 1, 2011, GWG entered into a Third Amended and Restated Note Issuance and Security Agreement with Lord Securities Corporation after receiving majority approval from the holders of Series I Secured Notes. Among other things, the amended and restated agreement modified the use of proceeds and certain provisions relating to the distribution of collections and subordination of cash flow. Under the amended and restated agreement, GWG is no longer restricted as to its use of proceeds or subject to restrictions on certain distributions of collections and subordination of cash flows.

Future maturities of Series I Secured notes payable at June 30, 2012 are as follows:

Years Ending December 31,
2012	$	12,003,000
2013		11,121,000
2014		8,286,000
2015		4,357,000
2016		1,155,000
Thereafter		4,840,000
	$	41,762,000

( 8 ) Renewable secured debentures

The Company has registered with the Securities and Exchange Commission, effective January 2012, the offer and sale of $250,000,000 of secured debentures. Renewable Secured Debentures have maturity dates ranging from six months to seven years with fixed interest rates varying from 4.75% to 9.50% depending on the term of the note. Interest is payable monthly, annually or at maturity depending on the terms of the debenture. At June 30, 2012, the weighted average interest rate of Renewable Secured Debentures was 7.75%. The debentures are secured by assets of GWG Life and GWG Holdings. The amount outstanding under these Renewable Secured Debentures was $15,906,000 at June 30, 2012. The difference between the amount outstanding on the Renewable Secured Debentures and the carrying amount on the consolidated balance sheet is due to netting of unamortized deferred issuance costs. Amortization of deferred issuance costs was $44,000 and $47,000 for the three and six months ended June 30, 2012, respectively. Future expected amortization of deferred financing costs is $835,000. Subsequent to June 30, 2012, the Company has issued an additional $8,600,000 in principal amount of these secured debentures.

-14-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The use of proceeds from the issuances of Renewable Secured Debentures is limited to the following: (1) payment of commissions on sales of Renewable Secured Debentures, (2) payment of offering expenses, (3) purchase of life insurance policies, (4) Payment of premiums on life insurance policies, (5) payment of principal and interest on Renewable Secured Debentures, (6) payment of portfolio operations expenses, and (7) for general working capital.

Future maturities of Renewable Secured Debentures at June 30, 2012 are as follows:

Years Ending December 31,
2012	$	1,308,000
2013		1,487,000
2014		2,792,000
2015		4,886,000
2016		444,000
Thereafter		4,989,000
	$	15,906,000

The Company entered into an Indenture effective October 19, 2011 with Holdings as obligor, GWG Life as guarantor, and Bank of Utah as trustee for the benefit of the debenture holders. The Indenture has certain financial and nonfinancial covenants. The Company is in compliance with these covenants at June 30, 2012.

( 9 ) Income taxes

The Company was a pass through entity for federal income tax purposes through June 10, 2011. No income tax provision has been included through that date in these consolidated financial statements as income or loss of the Company was required to be reported by the respective members on their income tax returns. Subsequent to the Company’s conversion to a corporation from a limited liability company, the Company will file and pay taxes based upon its reported income.

In 2012 there is a significant permanent difference between income before income taxes and taxable income. This permanent difference results from the inclusion of convertible redeemable preferred stock as an interest expense, however such dividends are not deductable for income tax reporting purposes. The dividends charged to interest expense were $573,000 and $979,000 for the three and six months ended June 30, 2012, respectively.

The most significant temporary difference between GAAP net income and tax net income are the treatment of interest costs and revenue recognition on the portfolio of life insurance policies.

( 10 ) Convertible, redeemable preferred stock

The Company began offering 3,333,333 shares of convertible redeemable preferred stock (Series A preferred stock) for sale to accredited investors in a private placement effective July 31, 2011. The preferred stock is being sold at an offering price of $7.50 per share. Series A preferred stock has a preferred yield of 10% per annum, and each share shall have the right to convert into 1.5 shares of the Company’s common stock until such time as the Company elects to automatically convert the preferred stock to common stock as described below. Preferred shareholders also received three-year warrants to purchase, at an exercise price per share of $6.25, one share of common stock for every 20 shares of Series A preferred stock purchased. The warrants are exercisable immediately. In the Certificate of Designations for the Series A preferred stock dated July 31, 2011, the Company has agreed to permit preferred shareholders to sell their shares back to the Company for the stated value of $7.50 per share, plus accrued dividends, according to the following schedule:

●	Up to 33% of the holder’s unredeemed shares one year after issuance:

●	Up to 66% of the holder’s unredeemed shares two years after issuance; and

●	Up to 100% of the holder’s unredeemed shares three years after issuance.

-15-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Company’s obligation to redeem preferred shares will terminate upon the Company completing a registration of its common stock with the SEC. The Company may redeem the shares at a price equal to 110% of their liquidation preference ($7.50 per share) at any time after December 15, 2012.

At the election of the Company, the preferred shares may be automatically converted into the common stock of the Company in the event of either (1) a registered offering of the Company’s common stock with the SEC aggregating gross proceeds of at least $5.0 million at a price equal to or greater than $5.50 per share of common stock, or (2) the consent of shareholders holding at least a majority of the then-outstanding shares of Series A preferred stock. The Company began issuing Series A preferred stock on September 1, 2011. As of June 30, 2012, the Company had issued 3,250,000 preferred shares resulting in gross consideration of $24,356,000 (including cash proceeds for new notes, conversion of Series I Secured notes and accrued interest on Series I notes, and preferred dividends). The Company incurred Series A preferred stock issuance costs of $2,618,000, of which $435,000 and $775,000 was amortized to additional paid in capital during the three and six months ended June 30, 2012, respectively, resulting in a net preferred stock capital balance of $22,513,000.

The Company determined the grant date fair value of the outstanding warrants attached to the Series A preferred stock was $183,000 and $203,000 for warrants issued through the three and six month periods ending June 30, 2012 and $22,000 for warrants issued through December 31, 2011. The Company may redeem outstanding warrants prior to their expiration, at a price of $0.01 per share upon 30 days written notice to the investors at any time after (i) the Company has completed a registration of its common stock with the SEC and (ii) the volume of weighted average sale price per share of common stock equals or exceeds $7.00 per share for ten consecutive trading days ending on the third business day prior to proper notice of such redemption. Total warrants outstanding as of June 30, 2012, were 538,234 with a weighted average remaining life of 2.70 years. Total warrants outstanding at December 31, 2011, were 139,417 with a weighted average remaining life of 2.76 years.

Dividends on the preferred stock may be paid in either cash or additional shares of preferred stock at the election of the holder and approval of the Company. The dividends are reported as an expense and included in the caption interest expense in the consolidated statements of operations.

The Company declared and accrued dividends of $573,000 and $990,000 for the three and six months ended June 30, 2012, respectively. Cash dividends of $698,000 were paid on or before July 13, 2012. 35,027 shares of Series A preferred stock were issued in lieu of cash dividends, pursuant to a board resolution declaring the dividend.

(11) Commitments

The Company entered into an office lease with U.S. Bank National Association as the landlord. The lease was effective April 22, 2012 with a term through August 31, 2015. The lease is for 8,881 square feet of office space located at 220 South Sixth Street, Minneapolis, Minnesota. The Company is obligated to pay base rent plus common area maintenance and a share of the building operating costs. Minimum lease payments under the lease are as follows:

2012 (remaining)	$	36,636
2013	$	74,752
2014	$	78,452
2015	$	53,288

( 12 ) Contingencies

Litigation - In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Contingency matter – Opportunity Finance, LLC, owned by Jon Sabes and Steven Sabes, is subject to litigation clawback claims by the bankruptcy trustee for third-party matters for payments that may have been deemed preference payments. In addition, Jon Sabes and Steven Sabes are subject to litigation clawback claims by the bankruptcy trustee for third-party matters for payments received from Opportunity Finance that may have been deemed preference payments. If the parties are unsuccessful in defending against these claims, their equity ownership in the Company may be sold or transferred to other parties to satisfy such claims. In addition, the Company loaned $1,000,000 to Opportunity Finance, LLC, and was repaid in full plus interest of $177,000. This investment amount may also be subject to clawback claims by the bankruptcy court. These matters may also distract management and reduce the time and attention that they are able to devote to the Company’s operations.

( 13 ) Guarantees of secured debentures

Holdings has registered with the Securities and Exchange Commission the offer and sale $250,000,000 of secured debentures as described in note 8. The secured debentures are secured by the assets of Holdings as described in note 8 and a pledge of all the common stock by the largest shareholders. Obligations under the debentures are guaranteed by Holding’s subsidiary GWG Life. This guarantee involves the grant of a security interest in all the assets of GWG Life. GWG Life is a wholly owned subsidiary of Holdings and the payment of principal and interest on the secured debentures is fully and unconditionally guaranteed by GWG Life. The majority of the Company’s life insurance policies are held by DLP II, a wholly owned subsidiary of GWG Life, however, the policies held by DLP II are not collateral for the debenture obligations as such policies are collateral for the credit facility.

-16-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The condensed consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantors and issuer because management does not believe that separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of Holdings or GWG Life , the guarantor subsidiary, to obtain funds from its subsidiaries by dividend or loan, except as follows. DLP II is a borrower under a credit agreement with Autobahn, with DZ Bank AG as agent, as described in note 3. The significant majority of insurance policies owned by the Company are subject to a collateral arrangement with DZ Bank AG described in notes 3 and 6. Under this arrangement, collection and escrow accounts are used to fund purchases and premiums of the insurance policies and to pay interest and other charges under its revolving credit facility. DZ Bank AG and Autobahn must authorize all disbursements from these accounts, including any distributions to GWG Life. Distributions are limited to an amount that would result in the borrowers (GWG DLP Funding II, LLC, GWG Life Settlements, LLC, and GWG Holdings, Inc) realizing an annualized rate of return on the equity funded amount for such assets of not more than 18%, as determined by DZ Bank AG. After such amount is reached, the credit agreement requires that excess funds be used for repayments of borrowings before any additional distributions may be made.

The following represents condensed consolidating financial information as of June 30, 2012 and December 31, 2011, with respect to the financial position, and for the three and six months ended June 30, 2012 and 2011 with respect to results of operations and cash flows of Holdings and its subsidiaries. The parent column presents the financial information of Holdings, the primary obligor of the secured debentures. The guarantor subsidiary column presents the financial information of GWG Life, the guarantor subsidiary of the secured debentures, presenting its investment in DLP II and Trust under the equity method. The non-guarantor subsidiaries column presents the financial information of all non-guarantor subsidiaries including DLP II and Trust.

Condensed Consolidating Balance Sheets

June 30, 2012	Parent			Guarantor Sub		Non-Guarantor Sub		Eliminations			Consolidated
A S S E T S
Cash and cash equivalents	$	10,663,831		$	430,994	$	-	$	-		$	11,094,825
Restricted cash		-			-		4,851,664		-			4,851,664
Investment in life settlements, at fair value		-			2,253,462		131,594,676		-			133,848,138
Other assets		67,631			46,219		374,113		-			487,963
Investment in subsidiaries		30,202,528			70,477,197		-		(100,679,725	)		-

TOTAL ASSETS	$	40,933,990		$	73,207,872	$	136,820,453	$	(100,679,725	)	$	150,282,590

L I A B I L I T I E S & O W N E R S' E Q U I T Y (D E F I C I T)

LIABILITIES
Revolving credit facility	$	-		$	-	$	66,000,000	$	-		$	66,000,000
Series I Secured notes payable		-			40,821,635		-		-			40,821,635
Secured renewable debentures		15,091,121			-		-		-			15,091,121
Interest		155,528			2,044,901		115,546		-			2,315,975
Accounts payable and accrued expenses		862,519			245,552		120,966		-			1,229,037
Deferred taxes		3,778,357			-		-		-			3,778,357
TOTAL LIABILITIES		19,887,525			43,112,088		66,236,512		-			129,236,125

CONVERTIBLE, REDEEMABLE PREFERRED STOCK		22,512,581			-		-		-			22,512,581

EQUITY (DEFICIT)
Member capital		-			30,095,784		70,583,941		(100,679,725	)		-
Common stock		9,989			-		-		-			9,989
Additional paid-in capital		7,605,748			-		-		-			7,605,748
Accumulated deficit		(9,081,853	)		-		-		-			(9,081,853	)
TOTAL EQUITY (DEFICIT)		(1,466,116	)		30,095,784		70,583,941		(100,679,725	)		(1,466,116	)

TOTAL LIABILITIES AND EQUITY (DEFICIT)	$	40,933,990		$	73,207,872	$	136,820,453	$	(100,679,725	)	$	150,282,590

-17-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Balance Sheets (continued)

December 31, 2011	Parent			Guarantor Sub		Non-Guarantor Sub		Eliminations			Consolidated
A S S E T S
Cash and cash equivalents	$	1,746,456		$	131,893	$	-	$	-		$	1,878,349
Restricted cash					822,227		3,972,075					4,794,302
Investment in life settlements, at fair value		-			4,876,389		117,292,135		-			122,168,524
Other assets		34,817			170,346		342,937					548,100
Investment in subsidiaries		17,026,465			61,326,724		-		(78,353,189	)		-

TOTAL ASSETS	$	18,807,738		$	67,327,579	$	121,607,147	$	(78,353,189	)	$	129,389,275

L I A B I L I T I E S & O W N E R S' E Q U I T Y (D E F I C I T)

LIABILITIES
Revolving credit facility	$	-		$	-	$	60,000,000	$	-		$	60,000,000
Series I Secured notes payable		-			48,179,271		-		-			48,179,271
Interest		-			1,779,796		108,039		-			1,887,835
Accounts payable and accrued expenses		889,676			507,015		7,416		-			1,404,107
Deferred taxes		4,308,217			-		-		-			4,308,217
TOTAL LIABILITIES		5,197,893			50,466,082		60,115,455		-			115,779,430

CONVERTIBLE, REDEEMABLE PREFERRED STOCK		12,661,276			-		-		-			12,661,276

EQUITY (DEFICIT)
Member capital		-			16,861,497		61,491,692		(78,353,189	)		-
Common stock		9,989			-		-		-			9,989
Additional paid-in capital		8,169,303			-		-		-			8,169,303
Accumulated deficit		(7,230,723	)		-		-		-			(7,230,723	)
TOTAL EQUITY		948,569			16,861,497		61,491,692		(78,353,189	)		948,569

TOTAL LIABILITIES AND EQUITY	$	18,807,738		$	67,327,579	$	121,607,147	$	(78,353,189	)	$	129,389,275

-18-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Statements of Operations

For the three months ended June 30, 2012	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Contract servicing fees	$	-		$	290,050		$	-	$	(290,050	)	$	-
Gain on life settlements, net		-			79,307			4,788,171		-			4,867,478
Interest and other income		2,745			2,237			42,581		-			47,563
TOTAL REVENUE		2,745			371,594			4,830,752		(290,050	)		4,915,041

EXPENSES
Origination and servicing fees		-			-			290,050		(290,050	)		-
Employee compensation and benefits		-			583,338			-		-			583,338
Legal and professional fees		364,698			(27,519	)		-		-			337,179
Interest expense		814,038			1,140,239			425,301		-			2,379,578
Other expenses		387,691			303,468			12,500		-			703,659
TOTAL EXPENSES		1,566,427			1,999,526			727,851		(290,050	)		4,003,754

INCOME (LOSS) BEFORE EQUITY IN LOSS
OF SUBSIDIARIES		(1,563,682	)		(1,627,932	)		4,102,901		-			911,287

EQUITY IN LOSS OF SUBSIDIARY		2,474,969			4,132,013			-		(6,606,982	)		-

NET INCOME (LOSS) BEFORE INCOME TAXES		911,287			2,504,081			4,102,901		(6,606,982	)		911,287

INCOME TAX EXPENSE		609,588			-			-		-			609,588
NET INCOME (LOSS)	$	301,699		$	2,504,081		$	4,102,901	$	(6,606,982	)	$	301,699

For the three months ended June 30, 2011	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Contract servicing fees	$	-		$	1,083,925		$	-	$	(1,083,925	)	$	-
Gain on life settlements, net		-			(83,353	)		5,019,821		-			4,936,468
Interest and other income		-			1,811			3		-			1,814
TOTAL REVENUE		-			1,002,383			5,019,824		(1,083,925	)		4,938,282

EXPENSES
Origination and servicing fees		-			-			1,083,925		(1,083,925	)		-
Employee compensation and benefits		-			458,750			-		-			458,750
Legal and professional fees		62,577			84,672			3,000		-			150,249
Interest expense		2,966			1,689,502			276,331		-			1,968,799
Other expenses		46,500			281,679			71,224		-			399,403
TOTAL EXPENSES		112,043			2,514,603			1,434,480		(1,083,925	)		2,977,201

INCOME (LOSS) BEFORE EQUITY IN LOSS
OF SUBSIDIARIES		(112,043	)		(1,512,220	)		3,585,344		-			1,961,081

EQUITY IN LOSS OF SUBSIDIARY		2,073,124			3,614,457			-		(5,687,581	)		-

NET INCOME BEFORE INCOME TAXES		1,961,081			2,102,237			3,585,344		(5,687,581	)		1,961,081

INCOME TAX EXPENSE		3,779,000								-			3,779,000
NET INCOME	$	(1,817,919	)	$	2,102,237		$	3,585,344	$	(5,687,581	)	$	(1,817,919	)

-19-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Statements of Operations

For the six months ended June 30, 2012	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Contract servicing fees	$	-		$	438,250		$	-	$	(438,250	)	$	-
Gain on life settlements, net		-			229,277			5,239,969		-			5,469,246
Interest and other income		3,049			3,192			42,653		-			48,894
TOTAL REVENUE		3,049			670,719			5,282,622		(438,250	)		5,518,140

EXPENSES
Origination and servicing fees		-			(6,500	)		444,750		(438,250	)		-
Employee compensation and benefits		-			1,117,084			-		-			1,117,084
Legal and professional fees		655,600			45,803			-		-			701,403
Interest expense		1,268,211			2,696,548			853,232		-			4,817,991
Other expenses		534,100			703,552			25,000		-			1,262,652
TOTAL EXPENSES		2,457,911			4,556,487			1,322,982		(438,250	)		7,899,130

INCOME (LOSS) BEFORE EQUITY IN LOSS
OF SUBSIDIARIES		(2,454,862	)		(3,885,768	)		3,959,640		-			(2,380,990	)

EQUITY IN LOSS OF SUBSIDIARY		73,872			4,017,864			-		(4,091,736	)		-

NET INCOME (LOSS) BEFORE INCOME TAXES		(2,380,990	)		132,096			3,959,640		(4,091,736	)		(2,380,990	)

INCOME TAX BENEFIT		(529,860	)		-			-		-			(529,860	)
NET INCOME (LOSS)	$	(1,851,130	)	$	132,096		$	3,959,640	$	(4,091,736	)	$	(1,851,130	)

For the six months ended June 30, 2011	Parent		Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Contract servicing fees	$	-	$	1,999,925		$	-	$	(1,999,925	)	$	-
Gain on life settlements, net		-		(45,327	)		10,339,436		-			10,294,109
Interest and other income		-		28,384			3,586		-			31,970
TOTAL REVENUE		-		1,982,982			10,343,022		(1,999,925	)		10,326,079